Unified progressive tax system

Lukas

Created: 2024/09/08Updated: 2025/03/22

Introduction

There are two things about our tax system in Austria that I don't like and they seem to be ubiquitous all around the world.

One, our tax system is pretty complicated. It has grown over time. For sure with many good intentions to make it more fair, but the increased complexity makes it more advantageous to people who can effort professional help to navigate this system.

Two, it seems odd that the more I earn and switch over to let my money work for me the less taxes I pay proportionally. Capital gains are valued more than work in this system. This page Verteilung.at shows how much taxes are payed every decile. Peeking at the 80-90% decile, around 47% taxes are paid, dropping to 45% in the highest decile, because a bigger portion of the income is made with capital gains.

Image of how much percent the different deciles in Austria pay of their income

The below image shows how much the effective tax rate is after social insurance tax and income tax. For a progressive tax system it is surprisingly linear, because the social insurance tax in blue is degressive.

This image depicts the progressive tax system of Austria, showing the relationship between different tax components and income levels. It shows that as an individual's income increases, the proportion of their income paid in taxes (both social insurance and income tax) also progressively increases, reflecting the progressive nature of the Austrian tax system.

Link to the Excel.

Additionally, capital gains tax is always 25% and property tax is almost non existent. This means investment into non productive assets is encouraged, which leads to less capital availability for the wealth creating economy.

Proposed Solution

I would get rid of income tax, social insurance tax, capital gains tax and all the different employer taxes and replace all of them with one single progressive tax. In addition the lowest tax bracket could be negative and replace unemployment and Mindestsicherung. Every unit of money minus deductibles is put into the same pool. From this single pool the tax to be paid is calculated.

Decreases in social security payments of the negative tax rate should be a percentage of the additional income. For example, if someone has no income, gets 12K social security per year and they start to earn 6K of additional income, the social security part should not be decreased one to one but with a percentage e.g. 50%. This means with 6K of income they would net 15K. How high the percentage should be, would need to be A/B tested. Ideally there is a feelable progression, as the change in income is what drives people.

It would also likely lead to much more productivity because participating in the economy up to higher middle class income is highly incentivized. Additionally, work and capital income are on an equal footing, as oppose to the current system which favors capital gains massively. This would lead to more investment in the free market and with other policies in place like described in How to solve the housing crisis would lead to much more disposable income per citizen and therefor more prosperity for everyone.

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